Physician Asset Protection: Symptom vs. Disease
Many physicians have a strong desire to protect their P.A. receivables from potential future creditors. This article argues that such desire is misplaced—that exposure of P.A. assets to creditors is merely a "symptom" of a much larger, hidden, and curable "disease."
The Problem with Asset Protection Schemes
Florida Statutes make it clear that a business arranging its affairs with the intent of hindering creditors is engaging in constructive fraud on creditors. Courts can rearrange the debtor’s affairs and pursue assets to help creditors collect. Since asset protection is fundamentally about hindering creditors, it is very difficult to argue that such schemes were not created with that intent. Worse yet, the statute of limitations often does not begin to run until the scheme is discovered.
Honest asset protection specialists admit this is true, but often assert that doing something is better than doing nothing
. The thinking is summarized as: What have you got to lose?
The Real Disease: Misunderstanding Income
The hidden disease is a matter of perspective. Small businessmen often view their income as wages from professional services, rather than as income derived from owning a business. This distinction is crucial.
Consider your stockholders agreement—it probably states that the corporation will buy your stock upon retirement for a nominal amount. You may only report that nominal value (or your share of receivables) as an asset on your personal financial statement. But in reality, your ownership may represent much more.
Ask yourself: how much would you earn if you worked for someone else? The difference between that figure and your current W-2 should be viewed as owner income. Multiply that difference by a standard business valuation multiple (say, five times earnings), and you may realize your stock is far more valuable.
Example
Suppose your W-2 is $400,000, but you would only earn $200,000 working for someone else. That $200,000 difference can be treated as owner income. At a valuation multiple of five, your stock could be worth $1,000,000. (Group practice valuations can be more complex.)
Rethinking Stock Value
Physicians are often told that buying and selling stock has negative tax consequences since the purchase price isn’t deductible. As a result, many practices prefer to keep stock prices low and distribute wealth through bonuses. This leads to undervaluing stock—and to the mistaken belief that receivables are the asset needing protection.
But what if you could sell your stock at a high price, pay only capital gains tax, the buyer deducted the price at the 37% income tax rate, and you controlled both sides of the deal with a lien on the assets? That’s not a fantasy—it’s achievable.
Two Proven Solutions
1. Employee Stock Ownership Plan (ESOP)
- An ESOP is a qualified retirement plan that primarily invests in employer stock.
- A bank loan to the ESOP is secured by corporate receivables (asset protection).
- The ESOP buys your stock, giving you capital gains treatment (the P.A. is converted to an Inc.).
- The corporation makes tax-deductible contributions to the ESOP, which then pays the bank.
- The corporate Board votes the stock owned by the ESOP, maintaining control.
- New physicians earn ownership via the ESOP instead of buying stock directly.
In essence, the corporation becomes an income tax–free entity.
2. Leveraged Buy-Out (LBO)
- A seller-financed asset sale where you receive capital gains treatment.
- It can be structured so that you control both the buyer and the seller in the transaction.
- The buyer deducts the purchase price over time, while you (the seller) hold a lien via an installment note.
- New investors buy into the buyer entity at a low stock price due to the outstanding note.
Conclusion
The true solution to small business asset protection is not elaborate schemes targeting receivables—it’s restructuring ownership and viewing stock as a valuable business asset. Strategies like ESOPs and leveraged buy-outs not only protect assets but also enhance long-term wealth.
